Carbon Credit Trading is a market-based mechanism that helps reduce greenhouse gas emissions. A carbon credit represents the reduction, avoidance, or removal of 1 metric ton of CO₂ (or equivalent greenhouse gases) from the atmosphere.

How Carbon Credit Trading Works?

  • Emission Cap: Governments or regulators set an emission limit (cap) for industries to control overall emissions.
  • Carbon Credits Created: Projects that reduce or remove emissions generate carbon credits. Examples include renewable energy projects, afforestation and reforestation, etc.
  • Credits Verified: Independent agencies measure, report, and verify emission reductions to ensure credibility.
  • Credits Issued: Verified credits are issued and recorded in a registry. Each credit equals 1 ton of CO₂ equivalent (CO₂e).
  • Trading (Buying and Selling): Companies that exceed their emission limits purchase credits from those that have surplus credits.
  • Compliance and Impact: Purchased credits help companies meet regulatory requirements and climate commitments.

Participants in Carbon Credit Trading

  • Regulated Companies: Industries such as power plants, manufacturing units, airlines, and cement factories that must comply with emission limits.
  • Project Developers: Organizations that implement projects generating carbon credits through emission reductions.
  • Traders and Brokers: Intermediaries who facilitate the buying and selling of carbon credits.
  • Governments and Regulators: Authorities that establish rules, standards, and monitoring mechanisms.

Where Does Trading Happen?

  • Compliance Markets: Credits are traded to meet legally mandated emission reduction targets. Examples: European Union Emissions Trading System (EU ETS) etc.
  • Voluntary Markets: Organizations voluntarily purchase credits to achieve sustainability and net-zero goals. Examples: Corporate net-zero commitments

Benefits of Carbon Credit Trading

  • Reduces Emissions: Encourages industries to lower greenhouse gas emissions.
  • Cost-Effective: Provides flexibility for companies to meet environmental targets at lower costs.
  • Promotes Green Investment: Channels funds into renewable energy and sustainable development projects.
  • Supports Climate Goals: Helps countries and businesses achieve net-zero and international climate commitments.
  • Ensures Transparency: Verification and monitoring systems enhance credibility and trust.

Source: PIB